Installment Loans of March 2023

When people need to borrow a small amount of money quickly, they often turn to payday loans. It means a lender gives you some funds — usually, no more than $1,000. You will need to repay these funds plus interest on your closest paycheck. However, what if you require a larger amount or can’t afford repayment within a couple of weeks? And what if the purchase is huge: like a house or a car? In this case, installment loans become a rescue. Like every loan type, installment credit has its pros, cons, and nuances, so let’s look at them in detail.

What are installment loans?

Installment loans allow you to get a sum of money and repay it monthly in smaller amounts, e.g., installments. For instance, you borrow $10,000 at once and need to make fixed payments of $1,000 every month. Besides a loan principal, you will pay an interest that might significantly vary depending on a lender, your credit score, and other factors.

Unlike a typical payday loan that needs to be repaid at a lump sum on your next paycheck, monthly installment loans can be issued for several months or years. Thus, an installment loan usually has a precise plan of fixed monthly payments. You know exactly how much you need to pay when the next repayment due date is, and what is the credit term. After you pay the whole amount, your loan account is closed, and you don’t owe anything. Such a loan term can last from several weeks to several years.

Where can I obtain an installment loan?

There are three major types of credit organizations that can lend funds to be repaid in installments. The main point you need to check is their license. In other words, you should apply for a place officially registered by financial authorities and have the legal right to provide consumers with loans.

Banks

Banks are regulated by The Office of the Comptroller of the Currency (OCC), The Federal Reserve System (The Fed), and the Federal Deposit Insurance Corporation (FDIC). They usually have higher interest rates than credit unions or private lenders but might give you better credit options if you request a loan as an existing customer. Besides, banks tend to have stricter requirements towards borrowers than credit unions or private lenders. To apply for a loan, you can visit a bank office or fill in an online form to pre-qualify. However, mostly, you will still need to come to a bank in person to sign papers and speak to a loan agent.

Credit unions

Credit unions can be regulated by the National Credit Union Administration (NCUA) or local state authorities, depending on how they are chartered. To apply for an installment loan at a credit union, you must be its member and pay some annual or monthly membership fee. There are two options depending on a particular union:

• You must be a member for a specific amount of time;
• You can obtain a loan as soon as you sign a membership contract.

To apply, you usually need to come to a credit union office.

Non-Banking Financial Institutions

Such lenders are private, and they are supervised by the Consumer Financial Protection Bureau but don’t have a banking license. Many of them have offers for borrowers with a low credit score or provide you with a loan if you don’t have any previous credit history. Many private lenders offer online installment loans and don’t require visiting a brick-and-mortar shop. However, you may sometimes need to have a phone conversation with a lender’s representative instead.

The whole application and approval procedure is usually quicker than the one in a bank. For instance, a private lender can offer you a same-date online installment loan. Still, you might need to pay extra fees, like loan origination.

General installment loan regulation in the USA

If you applied for a loan via a trusted licensed entity, your rights are protected by the abovementioned authorities. Don’t forget to make sure your lender follows the rules and provides you with transparent information on the following loan conditions:

• Your loan principal;
• Annual percentage rate of your loan;
• The total number of installments within the loan’s life cycle;
• All extra fees involved in your loan;
• Monthly installment amount;
• Fees for paying the loan off early;
• Fees for late payments.

A lender can’t oblige you to opt for insurance: it stays up to you. The only exception is the private mortgage insurance that you must have in particular cases.

How to qualify for an installment loan?

Various lenders have different requirements for borrowers. Some of them are willing to provide you with a loan even if you have a bad credit history or no history, and the others work exclusively with high FICO scores. So, it makes sense to shop around and compare various offers depending on your current situation. Besides, requirements differ depending on a loan type: for instance, a personal installment loan is less demanding than a mortgage. Generally, lenders check the following parameters before a loan approval:

• Your age and identity. In most states, you need to be at least 18 for all types of loans. It's different only in Alabama and Nebraska (you need to be at least 19), and Colorado and Mississippi with a minimal age of 21. Besides, you will need to provide a lender with your personal details like a driver’s license, passport, or other government-issued documents.
• Your credit score. Lenders mainly use FICO or VantageScore as the most popular credit score check models. The requirements for a minimum credit score are different and depend on a particular lender and your loan purpose. Some loans are not available or turn out to be very expensive if you have low credit scores. A lender performs a hard credit check via three major credit bureaus to know your score.
• Your credit record. A credit record contains the history of your loans and credit cards and how you made payments. Important: if your credit history has errors or doubtful points, you can fix it by contacting your creditors. It’s essential to have your credit record in good standing before applying for a loan.
• Debt-to-income ratio. As an installment loan implies monthly scheduled payments, a lender wants to ensure your financial situation allows you to do it. The ratio is calculated with a formula: your monthly debt payments are divided by your gross monthly income multiplied by 100%. For instance, if you make $7,000 per month and pay $200 per month for your personal loan and $1,700 per month for a mortgage loan, your debt-to-income ratio is 27%. Typically, a DTI below 34%-36% is considered a good one.
• Free cash flow. While a debt-to-income ratio considers only your loan payments, you don’t spend money only to pay your debts. Thus, banks and private lenders can request a history of your bank transactions. They do it to see how much you typically spend and how much funds you have left after all necessary monthly expenses. The more ‘free cash’ you have, the more willingly a lender will lend you money.
• Proof of income and employment status. The documents may include pay stubs, additional income like alimony, W-2 statements, etc. Most lenders prefer that borrowers have worked at their current place of employment for at least a year.

Major types of installment loans

All installment loans can be divided into two types:

Secured installment loans

Secured installment loans require collateral. If you don't repay the loan, this collateral becomes a lender’s property. Such installment loans are usually related to a car or a house purchase.

Unsecured installment loans

Unsecured installment loans don’t require any collateral. In this case, you usually get a higher interest rate as the lender doesn’t have any guarantee that you will pay the loan.

Besides, installment loans might differ by purpose. Your reason to get a personal loan can impact the loan amount and the interest rate you get. When you come to a bank, or a private lender, or apply for an installment loan online, you are usually asked about your loan’s purpose. It’s not an idle question: a lender might offer you different credit products depending on your needs.

What is more, your lender choice can also depend on a loan type. For instance, some lenders focus on car loans, and the others only work with customers who need to cover their credit card debts with the help of a new loan. Your credit history might matter, too. Although many lenders are willing to provide you with an installment loan without a hard credit check, it might affect your interest rate. So, generally, a person with a good credit history might get better credit terms.

Let’s look at various loan types by purpose. We will see how they differ, the real price of every loan option, and other essentials you need to know before signing a loan agreement.

Personal loans

Personal loans are installment loans that don’t have any particular purpose. It can be any emergency: car or home repairs, medical treatment, large purchases like home electronics, wedding, or funeral expenses. Some people take personal loans to repay the previous loans, called debt consolidation. It works like this: you take a new credit at a more lucrative interest rate, repay the previous loans, and keep repaying the new loan at lower interest. A personal loan term varies from several months to five years. The maximum loan amount doesn’t usually exceed $100,000.

How to qualify for a personal installment loan?

Particular requirements depend on a lender and the amount you want to take. All lenders perform a soft credit check, while some need certain credit scores to approve your request. Here are the key points that might be crucial for the loan approval, its interest, and terms.

• Your credit score. Most lenders check your FICO credit score to determine a loan amount and interest. Some don’t work with borrowers with a FICO score lower than 600. The others offer a smaller loan principal and higher interest rates to such customers. For instance, you can borrow $15,000 for three years with a 30% APR if your FICO score is 580, but the same lender might offer you an 8% APR if your score is 800 or higher. Some lenders have their scoring models, so they don’t perform a hard credit check.
• Debt-to-income ratio. Most lenders prefer having borrowers with a DTI of about 34%. Otherwise, they might consider giving you a loan too risky. However, this parameter is not always considered, especially when your loan amount is not too big.
• Your ability to pay. You need to prove sufficient income that is stable enough to pay regular installments.

A personal installment loan price: interest rate, fees

Interest rates vary depending on a lender and your financial status. The more reliable you seem to a lender, the more profitable loan they can offer. Your credit score usually affects the interest very much. While you can count on an APR below 6% if your FICO score is high enough, the interest rates can reach 600% if you have bad credit. The average rates vary between 18% and 36%.

So suppose you got a $4,000 loan at 10.52% APR. Your loan term is three years, e.g., 36 installments. Your monthly payment will be$130, so you will pay$4,680 overall, and the total interest will be $680.

Still, it might not be the only overcharge. Some lenders apply extra fees as follows:

• Application fee. Usually, a flat fee that may vary from $25 to $50;
• Origination fee. A percentage of your loan amount usually varies from 1% to6%;
• Payment protection insurance. An insurance that will help if you lose your source of income and won’t be able to pay for some time. It doesn’t usually exceed 1% of your loan amount.

Mortgage loans

A mortgage, a loan used mainly to purchase a house, is also an installment loan. Unlike personal loans, a mortgage is automatically secured by actually the house you bought using the credit money. Besides, it requires a downpayment: a percentage of your future home's total price that you pay in advance. As mortgage loans imply borrowing large amounts (a median house price in the USA is $374,900), they are considered the most-long term installment loans and may last up to 30 years.

How to qualify for a mortgage loan?

A mortgage has more serious requirements than personal installment loans. Here is what you will most likely need to prepare:

• Annual income proof;
• Federal tax returns for the last two years;
• Quarterly statements of your asset accounts;
• W-2 statements for 2 years;
• Any other income proof;
• Your employer contacts if a lender wants to verify you do work at the company you indicated;
• Personal documents: ID, license, SSN;
• Proof that you have funds for downpayment;
• FICO score no lower than 620. This requirement may vary depending on a lender and will affect your loan interest rate;
• A DTI ratio of a maximum of 43% or lower.

A mortgage loan price: interest rate, fees

Your interest rate for a mortgage significantly depends on your LTV: Loan-To-Value ratio. It is a ratio between an appraised property value and your mortgage amount. For instance, if you want to buy a house that costs $200,000 and make a $50,000 down payment, your mortgage amount will be $150,000. So, the LTV will be 150,000/200,000 * 100% = 75%.

Many lenders require a minimum LTV of 80%. However, some organizations have offers for those who can’t afford a 20% down payment and can only give 5% - 19,99%. In this case, however, you will need to buy private mortgage insurance, which will add 0,5%-1% more to your annual payments.

The interest rate for the loan might be as small as 2,3% if you have a FICO score of 760 or higher. The average rate is approximately 4,70%, though. The most common mortgage loan terms are 15 and 30 years. The shorter the period is, the less interest you pay. For instance, if you borrowed $150,000 at a 3,5% rate for 15 years, you will need to make installment payments of $1,155. In the end, you will pay $43,018 of interest. However, taking the same loan for 30 years will reduce the monthly burden to $1,050 but will accumulate the interest of $92,484.

Auto loans

Auto loans are similar to mortgages: you go to a lender or a bank, make a downpayment for a car, and get an installment loan at 2,5% — 25% depending on your credit score. The loan term typically varies from 24 to 48 months. Sometimes, a car becomes collateral for this loan, but it depends on your agreement with a lender.

How to qualify for an auto loan?

Auto loans are not only issued by banks and private lenders. You can also apply for a loan in a car dealer center, and they might offer you more competitive interest rates. However, all lenders will have more or less the same requirements:

• Proof of stable monthly income;
• A downpayment of about 9%-12% of a car price. Some lenders can do without a downpayment but will increase an interest rate;
• Good credit score. Some lenders offer auto loans to people with bad credit, but again, it affects the APR badly and results in very high-interest rates.

An auto loan price: interest rate, fees

Like with most loans, a lender will request credit bureaus to check your credit history and credit scores to help determine your APR. The APR may also depend on which car you want to purchase: a used or a new one. For instance, an average APR for a new vehicle might be 12% if you have a FICO score under 500 but can reach 19% if it is a second-hand option. The best rates you can count on are approximately 2,40% for a new car and 3,60% for a used one. To have such an offer, you need to have a FICO score above 780. A co-signer with a good credit score can help you qualify for a loan and get lower interest rates.

Student Loans

Student loans have two major types:

1. Federal student loans. Such installment loans come as help from the government and imply you pay only the loan principal while studying. The government pays the interest until you graduate. Since you are no longer a student, you should get a job and start repaying the whole loan: the principal and interest.
2. Personal student loans. Such loans don't have any governmental support and are just versions of personal loans.

How to apply for a student loan?

As students don’t usually have credit records, federal student loans don’t imply any credit checks. Instead, you need to fill in a Free Application for Federal Student Aid. It contains a range of questions related to your family's gross income and other essentials, like how many kids from a family are currently in college. According to the information you provide, a financial aid office in a college will decide on loan approval and its conditions.

If you want to take a personal installment loan for education but don’t have a credit record, it makes sense to apply with a co-borrower. Students usually have their parents as co-borrowers. If parents have high FICO scores, it becomes helpful in terms of the interest rate.

A student loan price: interest rate, fees

The average student loan amount is usually limited. For instance, you can't borrow more than $5,500 per year in most cases if you are a first-year undergraduate. The interest rates for federal student loans may vary from 3,73% to 6,28%.

Note! At the moment, a COVID-19 emergency relief program suspended payments on all student loans and zeroed the interest rates.

How to pay for an installment loan?

The payment method will depend on your lender and your agreement with them. The most common options involve the following:

• Automatic charge. According to your payment schedule, you grant your lender permission to charge your banking account with equal payments every month.
• Cash deposit at a lender’s store.
• Payments through a lender’s mobile app.
• Payments over the phone. You tell your debit card details to a loan agent during a phone conversation.

Can I repay before the loan term is over?

It’s possible, but it’s not always the way to go. When you feel you can repay your loan quicker and deposit larger monthly installments, it decreases the loan interest. It’s not what a lender wants so they might apply prepayment fees. Prepayment fees can come as a flat amount or vary from 2% to 5% of the loan amount. Still, some lenders, especially banks, don’t charge any prepayment penalties.

What if I miss a payment?

When you can’t repay the next installment, a bank or a private lender usually charges you a late payment fee. If you have insufficient funds in your auto-repay bank account, it can also be charged. Such a fee can come in two variants depending on your loan agreement:

• A flat fee between $25 and $50;
• A monthly payment percentage: from 3% to 5%.

Besides, a lender can send information about your missed payments to credit bureaus, spoiling your credit history.

Pros and Cons

Pros

• Fixed transparent payment schedule. You always know how much you must repay, and the interest rate doesn’t change;
• Credit history boost. A long-term installment loan can help you build a credit history and gain a high credit score;
• Possible low interest rates. Installment loan lenders can offer very lucrative interest options, especially if you have good credit;
• Quick financial aid. Installment loans are sometimes the only opportunity to make a large purchase, especially when you need them urgently.

Cons

• Amount overpaid. If you don't manage to find a competitive offer, you risk repaying a colossal interest that might exceed the loan principal amount.
• Down Payment fees. You might be charged extra fees when you want to lower the interest paid.